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Value.able: Woolworths worries its faithful fans

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Value.able: Woolworths worries its faithful fans

According to Value.able investor Roger Montgomery, Woolworths is approaching its intrinsic value. However, as he explains, the company faces so many challenges that new CEO Grant O’Brien is going to have offer a compelling new growth strategy very soon. Read Roger’s article at www.eureakreport.com.au.

INVEST WITH MONTGOMERY

Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.

This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.

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31 Comments

  1. Andrew
    :

    I forgive everyone in advance but i think this blog is the best place to ask this questyion and discuss something that many will find quite dull and boring.

    This subject is generally Accepted Accounting Principles.

    No doubt everyone has heard about the Qantas situation and there for probably were in similar situations to me in noticing a big increase in people talking about the business of Qantas.

    I have last financial years report saved down as i think understanding what a bad company looks like is more important than noticing a good one.

    Now anyone who has read or heard Roger talking about this probably knows where i am going.It’s the D word. Depreciation.

    Firstly i think we all agree with the premise that a replacement plane bought to replace a previous and scrapped plane will cost far more due to a number of things, not least that pesky inflation.

    My understanding is that instead of reporting the whole cost of purchasing a plane on the P&L, they will instead list a depreciation amount over a number of years.

    My research has shown that QAN depreciate their planes over 20-25 years on a straight line basis.

    My understanding of this is that a straight line depreciation will mean that the same amount is depreciated each year for that plane.

    Firstly, where is the best place to find research as to the true useful life of assets. (i understand that 40 years is accepted as a normal amount for buildings). Would it be competitors annual reports? I would assume all airlines would depreciate their planes for as long as they can get away for.

    In the case above where the replacement cost will be far greater than the initial purchase price, what do people think is the best way to account for it? Would it be to use one of the other depreciation methods where the amount increases over time, depreciate it more aggressively (quicker) etc.

    Also, when analysing a company like that (i probably wouldn’t to begin with), whats the best way to go beyond the spin and get a better picture of performance? Is it to make your own assumption on what you think is reality and adjust the figures otherwise?

    Sorry to bore everyone, but i am very interested in this investing game and improving. Interested to hear any of your thoughts.

    • Matthew R
      :

      Hey Andrew,

      Interesting question. I wonder if a better way to calculate the “true” depreciation cost of current planes would be to consider the current expense of PP&E & use that as a proxy? There is more in PP&E than just planes but it is the majority.

      • Roger Montgomery
        :

        Or inflate an exiting plane by 5% for twenty years Fv=Pv(1.05)^20, then provision for it each year to get the expense…The objective perhaps should be to replace depreciation as an item with an entry I have previously called “provision for replacement cost”

  2. Michael
    :

    Hi Roger,

    Why has the estimated intrinsic value of CSL dropped from $32.33 to $27.91? That’s a pretty significant difference. I understand that the $27.91 value might be for 2013 or 2014 but is it really possible that the intrinsic value of such a great company is declining by so much?

    Cheers,

    Michael

    • Roger Montgomery
      :

      Hi Michael,

      Its a function of performance and outlook. When the facts change, so does the valuation. Its as simple as that. I think knowledge of changing values and their direction are powerful allies in investing.

  3. Paul Eagle
    :

    Roger,

    Your WOW article in Eureka is confusing.

    One sentence says ‘So while the stock looks cheap ($24.22) compared to intrinsic value’

    But reading on your value in your portfolio table is $23.47 and you again mention your value of $23.47 at the end.

    How do you figure that WOW is cheap? Or am I missing something?

    Paul

  4. David M
    :

    Hi All,
    I have been looking at MCE again today and redid a valuation on them and still came up with an IV of $8.11 at 12% return after tax. I looked through different reports and could see nothing untoward. I know they have taken on some debt but it is still quite small. Are they on track with orders, and have the $500m of quotes on their books come in? i’ve not been able to see that. They still seem very cheap at the moment but am i missing something?

    • Andrew
      :

      i don’t follow MCE at all, but it has been covered more than any other company on this blog so if you look back at old posts comments i am sure you will hear a whole range of different opinions that you can use as a starting point to investigate further.

    • Andrew
      :

      Had a look out of curiosity to see what they have been up too, their latest presentation appears to have a little profit downgrade snuck into it. Shouldn’t be too unexpected, considering the comments being made on here about MCE though, in fact Roger has mentioned similar comments many times since the result was announced about the potential for one to happen.

      • David M
        :

        Thanks for your comments Andrew, I shall keep looking. They are only a very small portion of portfolio but i need to get to the bottom of what’s happening

  5. Michael Leslie
    :

    I think it is fair to say that Coles and Woolies are a bit concerned about the competition from Aldi. This company now has at least 10% of the market in the eastern states with more than 260 stores and over 1,000 grocery items. It is not only the volume of sales but the lead Aldi takes in the food retailing business – 100% fresh meat is Australian grown, 97% of produce is Australian grown, bread is delivered fresh on 7 days each week, 100% of profits is reinvested to open more stores and keep prices low, 100% refund if the customer is not 100% satisfied, first supermarket in Australia to have zero colouring in their entire range of groceries, first supermarket in Australia to introduce national unit pricing, prices have been shown to be 25% cheaper than their rivals, etc, etc. All this information and more is displayed on the Aldi website. In addition Aldi pays higher salaries and staff progress to Store Manager considerably faster that their major rivals.

    There are many other ways in which Aldi is ahead of the pack – customers return trolleys, staff sit at the checkout rather than stand, checkout processing is fast and efficient, the distribution network works, staff are truly multi skilled, other products (other than grocery lines) are on sale until sold out then replaced with something else. The product is high quality.

    I say all this because this is a business which appears to be a major threat to Coles and Wollies. Much more could be said but I am sure you now get the drift. If you have not visited an Aldi store go have a look and observe how this organisation knows how to do their stuff. I wish I could own a share of this business.

    • Peter
      :

      Michael,

      Surveys consistently show that one of the main customer determinents in choosing a supermarket is range. Coles & Woolworths stock about 30,000 lines, Aldi stock about 800. Case closed. Aldi attracts the “cherry pickers” who want to buy their high value items at a low price (Nappies, laundry detergent etc) and those in the lower socio-economic areas who are driven chiefly by price.
      Aldi is no threat to Coles & Woolworths and doesn’t try to be.

      Peter

  6. Greg Mc
    :

    G’day Roger,
    The reappearance of the Value.able portfolio prompts a question (and I note a few additions to the portfolio as well since it last appeared). You have Vocus’s IV listed far into the future – for 2014. Surely a fast growing, and acquisitive company like Vocus is nigh on impossible to value that far into the future. Is this a mistake or do you actually have a degree of confidence in that 2014 valuation?

    • Roger Montgomery
      :

      That’s the estimated value IF it meets current expectations for earnings in 2014. Internally we believe they will ear a lot more but the unknown is whether the per share earnings will do likewise.

      • Greg Mc
        :

        Yes, I accept that, and that the figure is what comes out after you put in what you think they’ll earn (conservatively). I just reckon it’s like piffing a dart at a board that far in advance (or in other words, I have no clue what they will earn in 2014).

      • Roger Montgomery
        :

        Understand. If lost at see with nothing more than a telescope, one would be a lot happier knowing, when peering through that telescope, he can see land on the horizon, no matter how distant.

    • Greg Mc
      :

      Yes, the penny has dropped with them that the market is not happy. Normally directors buying is a good sign but sometimes it occurs to prop up poor sentiment rather than necessarily that the directors think it is good buying. When Aaron buys as many or more at $2.90 as he sold much higher up, I’ll take that to mean that he thinks it is the latter.

      • Pat Fitzgerald
        :

        Hi Greg

        One analyst now has MCE’s EPS for 2012 at approx 33c, but more downgrades could be possible as they do not seem to be winning any significant orders.

    • ZORAN
      :

      MCE/ A Begley

      Mr Begleys timing of selling $3M worth of MCE near its high was very clever.
      His timing was perfect.
      Was it just luck?
      Buying now at $2.90, is this good luck or another perfect timing?

      Cheers
      Zoran

  9. Andrew
    :

    I was thinking about this in the morning and now i come on to see you raising a discussion on the similar topic. Don’t have a subscription to the Eureka Report so i can’t read your thoughts but i think i understand what you would be saying.

    My thoughts however were raised after i said last night to my fiance that i am going to coles to pick up a product. Usually i have been very loyal to WOW and still do buy most of my stuff there.

    I have been noticing that on recent visits to the local woolworths i have been unable to buy or find specific products i wish to purchase, the fruit and vege’s are of inferior quality but similar price to the local fruit and veg shop and coles.

    that has seen me turn from a very loyal woolworths customer to now will go to which ever one is the most convenient.

    It is very small things but i heard a good quote that is attributed to Walt Disney “the small details are the most important, they are the ones which will come back and get you” or something similar to that.

    As a company i still like Woolworths over Coles/Wesfarmers but if my observations become permanent ones and are spread over multiple or all woolworths than i can see a decrease in quality and performance. Am i going to be happy to go to Woolworths and buy stuff, and then need to pop over the road to coles to buy the stuff that i can’t get from Woolworths?

    Like i said, these are probably minor and might not be seen by other people and probably have no connection to what Roger wrote in the Value.able report. However, the halo around Woolworths in my mind is starting to dim a bit, to the point where i would need to think a bit harder as to whether i would invest in them or not.

    • Grant Rogers
      :

      Whilst Id love to shop at woolies, I just cant bring myself to do so.

      Im in the coles “loop”. Coles credit card used to buy Coles groceries, which gives me coles fuel vouchers (which I once again pay for using my Coles credit card).

      Although nowadays I spend more money at the healthfood store than grocery store..observation is still valid!

      • Harold JANUS
        :

        WOW and MCE are in my portfolio “Intrinsic” companies, however the market does not seem to think so. I am dismayed and worried that about their market value which is going down and down.
        Should I be concerned?
        Harold

      • Roger Montgomery
        :

        Hi Harold,

        When facts change you have to reexamine your assumptions and estimations and reevaluate. Have the facts for either company changed since you first researched and purchased them?

      • Simon
        :

        Down Down share prices are DOWN! Is that not a good thing? A larger MOS, more of a good thing at the same price? Buy your companies as you would groceries.

      • John C
        :

        Yes, Simon, but keep an eye on the quality of those groceries (and stocks) – is the quality the same, or declining?

      • Andrew
        :

        Share prices are down, however according to all my figures (which tend to be very conservative i will say in advance) the market is still quite expensive and very little value exists.

        I am sure you skaffodlers might disagree now that you are all probably buzzing about snapping up shares thanks to the figures on that. I hope you guys are all enjoying it.

        I would like to see (as all us value investors probably would) the market fall a bit further.

        I’m off to consider whether i should do what i did last year and sell shares in my melbourne Cup sweep pick to limit the downside.

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